L&T: Weak execution in India hits sales growth

Stand-alone margins up 140 bps y-o-y to 10.5%; analysts expect recovery in sales growth

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The performance of engineering and construction major Larsen & Toubro's core business in the June quarter has disappointed the Street, as execution remained weak in the domestic business.

Revenues in its core business (excluding subsidiaries) grew five per cent year-on-year (y-o-y) to Rs 10,338 crore. At the consolidated level, revenue went up 10 per cent y-o-y to Rs 19,123 crore and order book grew 13 per cent. Other than disappointing sales growth, the quarter's headline numbers have also been impacted by a one-time provision of Rs 942 crore for cost overruns in three projects in the hydrocarbon business.

The change in government might have boosted sentiments but ground realities have not improved. The company has stated power, metals and industrial segments, which continued to exhibit sluggishness.

Though the company's operating margins have expanded both at the standalone and consolidated level, the net profit growth during the quarter has been driven by exceptional items.

L&T's standalone net profit grew 35 per cent to Rs 894 crore, thanks to an exceptional gain of Rs 171 crore (generated by sale of investments). Adjusting for one-offs, the recurring net profit at the standalone level grew nine per cent to Rs 722 crore compared to last year. During the quarter, operating margins for the standalone business expanded 140 basis points y-o-y to 10.5 per cent. However, interest expenses rose 12 per cent during the quarter and depreciation expenses went up 40 per cent.

The infrastructure segment continues to be the company's mainstay both in terms of sales growth and profitability. Revenues for the infrastructure segment have risen 17 per cent year-on-year to Rs 7,148 crore, driven by heavy civil, transportation infra, water and renewable energy businesses.

The segment's margins expanded 60 basis points year-on-year to 10.3 per cent. During the quarter, power segment's sales declined 32 per cent, while that of metallurgical and materials handling declined 13 per cent. Analysts are not too worried about the company's weak revenue growth in the first quarter and believe the company will be able to meet the 15 per cent sales growth guidance for the full year, as execution would improve in the second half of the fiscal.

The company has chosen to provide Rs 942 crore for all the cost over-runs in its hydrocarbon business in the current quarter and the segment has booked a loss of Rs 890 crore. These projects and cost over-runs have been hurting margins for some time now.